Paper money today is fiat money. Since 1971, real assets have not backed the dollars that Americans spend. Paper dollars have value for government fiat: the government has declared that these printed dollars are legal money.
Due to the solid economic history of the United States, the dollar continues to perceive value in the United States and throughout the world. However, that strong story is becoming more distant both in time and in reality. For many reasons, fiat dollars become less and less valuable and, by the time people realize this, it may be too late to do something about it.
A brief history of fiat money
The official money in ancient Rome was the denarius. In 50 AD, the denarius was a pure silver coin, the emperors gradually reduced the silver content until the denarius contained less than 0.05% silver. When Rome collapsed, the denarius was unacceptable in exchange for goods and services. China used worthless paper as currency around the eleventh century.
The currency had value while China expanded its empire, population and trade surplus. When these declined, the money supply continued to increase, which quickly destroyed the economy and peace.
In France, an attempt to issue paper backed by currencies ended after excessive increases in the money supply and people were unable to exchange their paper notes now worthless of coins. In a more recent attempt, the inflated paper franc lost 99% of its value in 12 years. The Weimar Republic of Germany after World War I was charged with severe repairs on its part in World War I. He printed more and more useless paper money to pay off his debt.
Why fiat money always decreases to zero value
No government has been able to discipline its monetary policy. History has shown that fiat currency makes it easier for any government …
- increase the money supply through loans
- increase the money supply simply by printing,
- increase spending: the deficit deficit particularly harmful,
- attach burdensome regulations to the money you spend, and
- Expand your control of society and business.
Some reasons (called emergencies but are really excuses) for these dangerous economic decisions are:
- financing a war,
- facing a natural disaster,
- responding to the shortage of an energy or food product,
- the widespread greed of government officials to gain additional money, power and influence,
- an economic recession, even a cyclical recession, and
- an economic crisis, as in 2008, that threatened the entire monetary system.
Some of the consequences of undisciplined government actions with fiat money have been:
- a growing national debt with its interest burden,
- difficulty finding organizations or nations to buy the growing debt,
- inflation, or even hyperinflation,
- the decrease in the purchasing power of savings,
- decreased consumer confidence,
- a movement to exchange fiat currency for assets that have real value, such as gold or property,
- a growing dependence on government payments,
- less space for businesses to benefit and grow as government activity expands,
- a decreasing tax base,
- government breach of its obligations such as pensions or rights,
- civil unrest, and ultimately
- A change of government or monetary system.
The United States movement to fiat money
Until the great depression, the United States was in the gold standard and dollar bills could be exchanged for gold. In 1933, the dollar was devalued, but it was still backed by gold. With this gold backing and a strong economy, the US dollar was accepted as the world reserve currency after World War II.
The economies of most countries involved in World War II were in ruins. However, deficit spending during the Vietnam War caused nations to redeem their weakened dollars. With the increasing depletion of the US gold supply, President Nixon ended the dollar's gold support in 1971.
President Nixon's action turned the US dollar into fiat money that in itself is worthless and is not backed by real value assets. At the same time, all world currencies that had been linked to the US dollar since 1945 also became fiat money.
However, in 2010, because the United States economy had remained relatively strong, the dollar remains the world's leading reserve currency. Global products such as oil and gold are priced in US dollars. While the euro had strengthened to become an alternative reserve currency, recent problems in several European economies caused many to sell euros and buy US dollars along with gold and other real assets. The situation in Europe has stabilized at the moment and the euro is rising again.
The growing weakness of the US economy
However, the key position of the dollar in the global economy is increasingly questioned. There are good reasons to question the value and strength of the dollar. The United States government is guilty of all actions that make fiat money worthless, and the United States economy has experienced almost all the consequences mentioned above. Current policy only increases these effects and puts the US economy at greater risk. Some current and very serious dangers facing the United States economy are:
- Continuous deficit spending. Since the economic crisis of 2008, US budget deficits have tripled and are expected to remain for more than a billion dollars for many years.
- Increase in the money supply. There are more dollars and fewer purchases in a recession; There are too many US dollars and their value is necessarily falling. Many of these additional dollars actually belong to countries that buy our debt, such as China and Japan. Possibly, other dollars are simply printed, such an addition to the supply would immediately devalue our money.
- Increase in national debt: since the economic crisis of 2008, the national debt has grown by more than 3 billion, more than 30% in 2 years. Unsustainable, but no leveling in sight.
- Higher interest rates: Since interest rates have been at record lows, the cost of borrowing so much money has been relatively low. Higher interest rates could make a broken budget not fixable.
- Pension rights and commitments. The long-term obligations of the US economy. UU. Now they exceed 100 billion dollars. It is impossible to find so much extra money with 4 billion dollars of deficit spending every day. This is also unsustainable.
- Inflation. The dollars will not buy so much. Consumers with liquidity problems would need to reduce spending further. And companies that need customers would face higher costs and need to increase prices while courting customers who need lower prices. Inflation will weaken both the US dollar and the US economy.
- Flight from the United States. More companies and dollars are leaving an increasingly hostile business and tax environment for the friendliest hosts. This further weakens the US economy.
These risks could spiral down and worsen dramatically. In addition, other dangers that the US economy may face are:
- Countries that sell dollars. Many countries have kept dollars in reserve and many countries have bought parts of the $ 13 billion debt. How much weakness in the dollar or the US economy will cause the massive sale of dollars?
- Serious terrorist attack. God forbid this from happening, but such an event will create a fear that could trigger drastic "emergency" actions, such as the sale of coins for gold and other assets. This could destroy the fragile US dollar or other fragile currencies and economies.
- Breach of another national currency. This would negatively impact credit, commerce and international corporations, creating fear again and putting additional pressure on the economy of the United States.
Greece almost failed to comply with its obligations, a situation that caused all of Europe to stir. Fears that its breach could overthrow the precarious economies of Portugal, Spain and Ireland encouraged the world to lend money to Greece and give it time to correct its problems.
How long? More debt for Greece is an additional long-term burden. Can you solve your problems amid violent riots? What about other countries on the brink of disaster? Which one can (almost) default later? If these smaller economies fall, the largest economies in France, England and Germany will also be at serious risk.
Global impact if the fiat dollar ceases to have value
World economies are connected and many will fall if the US dollar ceases to have value. Countries that have reserves in US dollars will weaken. Even if some creditor nations with vibrant economies can maintain value in their currency, the impact of the dollar's decline will be severe.
The world needs the United States to be strong and buy its products. For example, China can resist the loss of its US dollars and its debt, but if the United States cannot afford to buy its products, at best, a large number of Chinese factories and businesses will close.
It does not matter if the fall of the US dollar precipitates the global economic collapse or if the collapse begins in other parts of the world. Many national economies are on the verge of default or collapse and could fall rapidly. However, in the face of these concerns, governments still seem to be lending and spending, increasing debt and deficit, the same actions that have brought the world to the edge of the precipice.